The Internet Didn't Kill Blockbuster, The Company Did It To Itself

News this week that Blockbuster will shutter its remaining 300 retail stores was greeted with the typical pithy analyses about the Internet changing everything. They’re all wrong. Digital content distribution didn’t kill the video store. We did it to ourselves.

I say “we” because I worked at Blockbuster in the mid/late 90s, so I had not only a front-row seat, but a small speaking role in the unfolding drama.

The video rental business was hugely profitable from the get-go. It had grown organically, without benefit of startups and VCs chasing the vague promise of future riches. Video gave consumers the ability to time-shift programming, which was sorta like getting released from entertainment prison. This meant that manufacturers could charge lots for VCRs. But the studios chose to price the tapes ludicrously high, too — north of $75, if I remember correctly — which didn’t work so well. Rental stores popped up to intermediate that gap and, once a tape had been rented a few dozen times, it yielded 100% profit thereafter (porn titles broke even faster). The business model was beautiful.

The model was also simple, as the right titles in the right stores at the right times meant more rentals, so retailers could make even more money through improvements in distribution and inventory management. When Blockbuster bought up those independent stores, it was able to pool their supply and transaction data, which yielded some of those operational efficiencies (and let it profitably ignore porn). After getting acquired by
Viacom in 1994, the company recruited a handful of senior Walmart execs to deliver more operational brilliance. We applied Big Data insights about customer needs before there was a term for it. In-store selections got better and better.

Only then the floor dropped out on Hollywood box office receipts, which had slowed by almost 2% in 1994, and barely recaptured three-fourths of that loss in 1995. It turns out that for all the talk of a great branded offering, the main mover of movie rentals was box office popularity, not in-store experiences. Visits were a necessity, not consistently a happy choice.

With traffic down, the company elected to focus on upping the value of each transaction “basket.” This meant filling the stores with lots of candy, throw-away toys, and other “impulse” purchase items, displayed at little kid height so parents would be forced to buy it. Then all the Walmart types were thrown out (along with yours truly) and replaced by former executives from 7-Eleven.

Blockbuster was reimagined as a convenience store.

The problem with this strategy is that it never acknowledged, let alone addressed the fundamental promise and peril of the business: If people didn’t come to find movies they wish they hadn’t missed in the theaters, no amount of add-on retailing could replace that once-glorious rental income. Blockbuster didn’t have a technology problem — digital distribution was minimal, albeit talked about incessantly — but rather a customer problem. It gave them no reason to visit stores in lieu of a latest, greatest hit.

The solution would have been to focus on consultative or advisory selling, and turn its store associates into de facto recommenders. It could have implemented true social networks to rate and catalog movies, and used its customer data to develop a predictive engine that members could use to locate new titles. Store associates could have been encouraged (and incentivized) to establish ongoing customer relationships, and found ways to promote all those library titles (that had already been paid off, so they were pure profit). It could have owned the position of movie experts and migrated that brand to any new distribution platform. Blockbuster could have written a business school case on its reinvention, and who knows what role it could have crafted for itself this decade, or beyond?

Of course, we know it crafted its own demise, running its stores…and treating its employees…like a convenience chain, only the product it retailed was no longer so convenient. Even forsaking those onerous late fees couldn’t make a difference. Blockbuster didn’t lose its customers to
Netflix or digital; they’d already long ago stopped belonging to the company in anything other than name. Membership meant nothing, or nothing good.

So what are the lessons to be learned from Blockbuster’s demise? First, understand what business you’re in. Blockbuster thought it was in the entertainment distribution business, but it was really all about retail customer experience. Second, make sure you’re looking at the truly big Big Picture. When Hollywood box office receipts faltered, it didn’t change consumers’ need for something to do with the time they would have spent watching hit flicks (i.e. it was an opportunity, not a problem). Third, don’t let the technology Greek Chorus take credit for changing the world. Digital would have changed Blockbuster’s business, for sure, but it wasn’t its killer.